Monday, May 30, 2011

I’d like to dedicate another blog post to the issue of athletes and financial literacy. Around the time of my previous post on the topic, NPR featured a story about professional athletes and their financial literacy (the link is provided at the end of this post). The article mentions Kenny Anderson, who earned more than $60 million during his 14 years in the NBA, yet declared bankruptcy the year his career ended. The story goes on to talk about what happens when athletes acquire great wealth without having a clue about money management. Even in the NFL, which has the most college graduates, players often do not have any experience managing money, including what they might learn from paying for a college education, as they generally attend college on a scholarship.

I sent the NPR story to Reggie Howard, who is the President of the United Athletes Foundation and cares deeply about this topic. His reply came back with even more sobering information. He was just informed that 15 athletes in one city alone have been victimized by a single financial advisor. Each athlete gave the advisor’s agency control over their bill payments and money management and all got a bad deal. No one ever talked about it, which allowed the advisor to continue to use the same method on each player. Reggie was outraged and ended his message with the passionate tone he uses when he talks about victimized players: “This subject really gets my blood boiling. We have to change this.”

Stories like this one illustrate yet again the dire consequences of financial illiteracy. Unfortunately, professional athletes—newly wealthy, young, and inexperienced—are ideal targets for scams or unscrupulous advisors when instead good financial planning is the thing they need the most. Even for those making very sizeable incomes, there is no guarantee that the money will last a lifetime; athletes’ career paths are very unique (for example, they can be quite brief) and risky (a serious injury can put a quick end to a high income), and this requires even more skillful money management than normal. Sound planning is needed to make sure that money will extend well beyond the careers of players, that it is invested to grow over time, and that it is not squandered in unsustainable lifestyles or in risky investments that players do not understand or have experience with. And athletes need to know how to protect their wealth, including how to avoid bad advisors and unscrupulous agents and how to make good decisions when presented with well-intended requests or investment suggestions from friends.

We cannot expect all professional athletes to be experts in dealing with money. They become wealthy very early in life, before they have had a chance to gain any experience in dealing with financial matters. Their colleagues are mostly other athletes or sports professionals, so it is not possible to get much help from their peers. In my view, some money management has to become part of the standard, ongoing services that are offered to athletes. In the same way that it is standard for athletes to have coaches, doctors, and managers to help take care of their physical fitness, so it should be standard to have help in taking care of their financial fitness. And this help has to be specialized, designed to fit the needs of the very specific career that athletes face. Finance and financial decisions are too important, with potentially profound consequences for athletes' lives, to just be left for the athletes to figure out on their own.

Like Reggie, I detest the idea of athletes going bankrupt. It is not just the fact that it is unjust, unnecessary, and ugly as hell. It is also that we look up to and admire these people. Unlike them, we cannot bound up two flights of stairs without gasping for breath, we have back pain from sitting long hours at a desk, and we have boring jobs and screaming children. But when we see these athletes play, they make us dream. We believe they are special and we admire their skills and talents. This is why we get very upset when we find out that an athlete has, say, a gambling problem or beats up his spouse. In our eyes, they are better than we are, and they should do better than we do. And to young people, athletes are practically superheroes. Telling kids about athletes’ financial troubles would be like breaking the news that the Bat mobile has been repossessed. If athletes are in financial trouble, then, well, they are just like the rest of us. I’d like to see them be better equipped to make good financial moves; maybe if they can do so, the rest of us will follow.

Wednesday, May 11, 2011

I was recently invited to participate in a panel on financial literacy that was organized by the United Athletes Foundation (UAF) and the STAR EMBA program at the GW School of Business. It was held at the New York Stock Exchange, and it was good to go back to NYSE a second time. I had accepted the invitation without giving much thought to who would be in attendance at the event. A few days before the event (which was held April 29, 2011), I was given the list of the panel participants: Robert Marcham (moderator), Annamaria Lusardi, Ray Lewis, Rushia Brown, Chuck Lewis, Bill Imada, Sam and Char McNabb, and Gordon Brown. I had not heard of these financial literacy experts before and wondered whether they were academics as well (please, remember that I was born in Italy, so I do not know very much about American football or basketball). So, it was not until I arrived at NYSE that Friday that I discovered that Ray Lewis was THE Ray Lewis of the Baltimore Ravens, Sam and Char McNabb were the parents of THE Donovan McNabb, and Rushia Brown was THE Rushia Brown. There I was sitting on a podium to the right of superstar Ray Lewis, speaking to an audience of athletes and their families as well as the President of the UAL, Reggie Howard. Oh boy, I was in deep trouble!

I was the first on the panel to speak. I talked about the troubling state of financial literacy in the population, of the divide between those who know and those who do not know, of the sharp contrast between the complexity of financial markets and the very low level of financial knowledge that most people have. I spoke of the dire consequences of the lack of financial literacy; it is those who are less financially literate who pay more for financial services, who are more likely to engage in high cost mortgages and to default on them, and who are less likely to take advantage of the financial markets or to accumulate wealth. In the same way in which skills, practice, and experience help athletes to score and avoid faulty steps, financial literacy empowers people to take advantage of the opportunities offered by financial markets and to avoid scams or running into financial trouble. I also spoke of the difficulties that athletes may face in managing their finances and taking care of themselves, their families, and their communities both because of the peculiarity of their short careers, the increased complexity of financial markets that everybody is facing, and, of course, their fame.

Ray Lewis spoke next. He simply blew everyone away. He spoke of what financial literacy means to him, and the problems he has faced. He reflected on the grim statistics we had heard from the moderator that more than 70% of NFL players are bankrupt, unemployed, or divorced a few years after retiring. He talked about how many young athletes are ill informed about investing and managing their money and the problems that result. And he spoke of the need for athletes to be worry-free when on the field practicing or playing—absolutely nothing should distract from the focus on the game. He spoke with a passion and an intensity I have not seen in any person. I have a Ph.D. in economics and am myself passionate about financial literacy, but I could not have articulated the case for financial literacy the way Ray Lewis did.

Sam and Char McNabb spoke of the continuous worries that parents of athletes have about their children. From the anticipation of who will be drafted to the journey through the games, injuries, victories, and losses, they spoke of the desire to protect their son from making bad financial decisions, but the difficulty they face in knowing where to turn for advice. It was when Char McNabb spoke that I realized that about half of the audience were mothers of athletes. She asked them to raise their hands, and so many hands went up! I cannot begin to tell you how appealing it was to see that it is their mothers who the athletes brought to this event; it is them they turn to, whom they trust. I developed an instant affinity for these football players! And when the speaking was finished and I watched the mothers posing for a group photo, I could clearly see where the determination of these athletes comes from!

Sitting among these extraordinary people, I started to dream. What if these athletes became the champions for financial literacy? What if they spoke to students and told them how important it is to become financially literate. Students would listen to them; they look up to athletes. Imagine if we could organize a competition among schools, and the students who got a perfect score on a financial literacy test would get to spend an hour with, say, Ray Lewis or Reggie Howard, to listen to the stories of how they trained to win a game and why they care about financial literacy. Imagine if one of these players decided to become a spokesperson for financial literacy. Imagine…

As I hope I have conveyed, this was not my usual financial literacy conference, and not my typical audience. But it was a special day, and it illustrated how profound and widespread financial illiteracy is and how severe the problems associated with it are. And everybody can be affected by it, even the superstars we watch on TV. At the close of the panel, I got a warm handshake from Ray Lewis; he said he enjoyed my talk. It was . . . priceless!

You can look at some of the photoes of the event on our Facebook. Here is the link: http://www.facebook.com/media/set/?set=a.174503175936844.49893.119369231450239&saved

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About Me

Annamaria Lusardi is the Denit Trust Endowed Chair of Economics and Accountancy at the George Washington School of Business. Previously, she was the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College. She has taught at Dartmouth College, Princeton University, the University of Chicago Public Policy School, the University of Chicago Booth School of Business and the Graduate School of Business at Columbia University. From January to June 2008, she was a visiting scholar at Harvard Business School. She has advised the U.S. Treasury, the U.S. Social Security Administration, the Dutch Central Bank, and the Dartmouth Hitchcock Medical Center on issues related to financial literacy and saving. She is the recipient of the Fidelity Pyramid Prize, awarded to authors of published applied research that best helps address the goal of improving lifelong financial well-being for Americans. She holds a Ph.D. degree in Economics from Princeton University.